Could Europe Survive a Slowing Germany?

A shopper passes the national flag of Germany and Brandenburg Gate, right, in Berlin.

Thursday’s data out of Germany made for grim reading.

The closely followed Ifo Index dropped in May for the first time since October and the dip was big. The three-point fall brought the index down to a level not seen since November 2011.

Purchasing Managers Indexes were also discouraging as the manufacturing survey fell to a near three-year low.

Data for the first quarter showed the German economy grew at 0.5% on the quarter, but that’s backward looking. Official forecasts from the Bundesbank and Germany’s Finance Ministry suggest that Germany will grow at a slower pace going forward.

The common wisdom is that this development will be bad for the rest of the euro zone.

If the German economy slows down, especially the domestic economy, then that will put a drag on peripheral economies as German imports from those states slow.

Maybe, but this would assume that a rising Germany helped lift peripheral European economies. The evidence of this is actually less convincing than one might think.

In a recent research note, Carsten Brzeski, an economist with ING based in Brussels, points out that while German imports in total grew by about 13% in 2011 versus 2010, its import growth from much of the euro zone periphery, especially Spain, Greece and Ireland was weak or, in the case of Ireland, negative.

“The main message is that if we look at the periphery,” excluding Italy, the trade link to Germany is in fact “very weak.”

Indeed, while official data show that Italy was ranked fifth as a land of origin for German imports in 2011, Spain was 14th, while Portugal and Greece were 32nd and 49th respectively.

The linkage should work “both ways”, Mr. Brzeski reckons. Thus, a strong Germany does not necessarily make a more resilient Greece or Spain. Conversely, a weaker Germany will not necessarily hamstring the aforementioned states.

Other economists take similar positions. Ken Wattret, of BNP Paribas, says theory suggests that more domestic demand in Germany will boost the country’s imports and take a step toward lowering Germany’s trade surplus and the periphery’s trade deficits, or a “rebalancing” in economic jargon.

“To an extent that’s true,” he says, “but the impact of more consumer spending in Germany on trade in the periphery is pretty low.” Moreover, “the biggest beneficiary of more consumer spending in Germany might be Germany,” he says, postulating that a German with extra money to spend might buy a car from a domestic brand.

“Still, every little helps,” when it comes to a rebalancing, he says.

Therefore, even if the effect might not be as great as expected, a slowdown of the German economy is not what the euro zone needs now.

Comments (1 of 1)

Rubbish. What does Germany import from Greece? Olives - nothing else (Check the trade balance beween those countries). Greece has done a fantastic job to keep German tourists from spending their holidays there. (Nazi Comparisons, Strikes, Burong German Flags). That has nothing to do with economics as Greek holidays are 10% cheaper than a year ago - still 30% reduction in bookings. Here is the truth: Greece competes with Asia, North Africa and Turkey. If Germany faces a skump, the Euro will devalue. That means Greek products get cheaper in neighboring Turkey and North Africa, while it gets more expensive e.g. to spend holidays in these countries. The idea that competition is mainly inside the Eurozone is totally naive, as Northern Europe effectively competes on a Global level, while Southern European products and services have been substituted mainly with products and services from outside the Eurozone. I wish some Bloggers or Journalists would start to burn their freshmen enonomics books from the 1980s. Asia has risen dramatically over the last decade and the club med countries are simply the counter balance of that rise.